How does my deal compare to what you're currently underwriting?
Hey Everyone – Recently executed a PSA to acquire a Marriott hotel and am looking for some feedback from the institutional folks on here on how it stacks up return wise versus what you all are currently underwriting (hotel or any other real estate asset class).
For context, I’m just helping my family execute an exchange as we recently sold a building, so I don’t do REPE for a living, but do have general PE experience. Also, our family currently owns hotels and other asset types so we understand and are comfortable with hotels.
Total PP inclusive of all fees/renovation estimates is ~$40m, trailing NOI is ~$3.3m so entry cap is ~ 8.2%. Loans are coming in around 63% LTV at ~7.2%. Assuming NOI holds at $3.3 in early years we’ll get about an 8% annual coupon. If we can grow NOI 5% per year for 5 years and sell at the same cap rate it’s a ~2.0x MoM. There are no promotes or anything so the gross returns go to us.
These rough returns are a little below what we targeted in prior years, mostly driven down by borrowing costs, but we have an exchange so the tax benefits significantly outweigh not doing a deal rn.
Appreciate your feedback!
Cap rate feels tight, seeing most deals at 9%+ t1 cap rate wise but would need to understand asset profile further to assess. That debt quote is spectacular and sort of negates cap rate as you’re getting a decent CoC there assuming ops hold steady. Most lenders are at S+600-800 for hotels these days and max 60% ltc. All in all doesn’t feel that bad on these very cursory details.
We're doing hotels. Cap rate is very low. Your pricing needs to come down to probably $35M. Debt rate is amazing.
If you're equity doesn't care about returns then ignore what I said but you're definitely top of the market here on pricing.
Are people missing the fact that reno's are included in his cost basis? I don't know about yall but to me, going in cap is NOI / Property Purchase price, not including finance fees, or renos. He might actually be at 9 or 9.5% cap depending on those amounts.
"Total PP inclusive of all fees/renovation estimates is ~$40m, trailing NOI is ~$3.3m so entry cap is ~ 8.2%."
Really appreciate the thoughts. A few clarifications, our purchase price is below $35m adding the PIP/Renovation of $5m gets us to $40m. After getting some upside from the renovation and some savings from insurance our normalized year 1 NOI should be about $3.6m so about a 9% cap? Also this is in California, only a few miles from a popular beach so its a high barrier to entry market.
Your PIP is brand mandated likely. You have to complete it no matter what. You have to factor the cost into your cap rate calculation no matter what. I mean if it's a high barrier to entry coastal market in Cali. A 9 cap seems good. Is that a 9 cap on proforma or t12.
PIP will likely help increase NOI so you gotta bump it up to, now we're talking about stabilized yield. 9 cap seems slappin for Cali hotels of that size.
Edit: I just re-read your post and see that your family has lots of experience with hotels. So my post below doesn’t make as much sense. But whatever - I’ll leave my post with the point being… idk if those are good returns without knowing the full picture. 8% cap for certain assets is a steal and for others it could mean certain death. Just depends on non financial factors
Is the labor union?
What are the demand drivers (hopefully it’s more than just the beach)?
What % non-group vs Group?
Youre close to the beach… what are the projected insurance costs like?
Is the deal going to be Marriott managed in addition to having a Marriott flag? Have you vetted OpEx with an experienced third party management company?
Do you have on-site parking?
How is the property performing compared to it’s peers (hopefully you saw an STR report)?
What is the new supply picture? Are you the only Marriott in the submarket?
What % of your revenue is F&B (I’m assuming low given the good financing terms)?
Have you had Ryan Tax provide an estimate for taxes going forward?
Since this is California… which side of the highway are you on? Are all of your peers on the better side of the highway?
How extensive is the renovation / PIP and which GC will be executing it? What’s their experience with similar projects? Will you be getting any key money? Who will be the day to day asset manager?
What do your sale comps look like? And it’s not as simple as pulling the cap rate off costar - sometimes sale prices will be misleading because there’s a ground lease, tax abatement, vacant land is thrown in with the asset sale, whatever… you may not pick up on it unless you talk to a local broker who has the inside scoop on the deal.
No need to actually answer my obnoxious list of questions, I’m just illustrating a point: the numbers rarely make or break a deal. It’s everything else that makes or breaks a deal. When you’re first learning real estate you’re thinking “this is easy, it’s like PE but more straightforward business plans and income statements”. But there’s more to it and you pick it up with experience. I’m also not a hospitality specialist at all so I’m probably just scratching the surface with this list.
Your deal could be great or it could be dog shit - just depends on everything else besides the numbers.
Again really appreciate everyone’s thoughts. I did look at quite a few deals and certainly found some 9%-10%+ cap rate deals but they were in markets like Montana or Colorado or Arizona (I stick to the west) where there is a steady supply of new hotels. And those are the hotels/markets that haven’t been able to grow revenues since 2019 this on a flat or downward NOI trend. For our limited service hotels if you can’t grow revenue you’re gonna get hosed on margins for a long time, so I’m opting to pay up for high revenue growth.
A couple things. Do you have a verbal commitment or are you under contract at the 9 cap or you think it will close? Just make sure you are adjusting for taxes, I can see that being a pain. Something seems a bit off here, I dont see good product in Cali on the coast especially trading for a 9 cap. So just be sure to dig in and make sure you're not missing anything.
edit: nvm I saw you executed the PSA. I would just do your DD on this. A 9 cap seems to good to be true if its in a high barrier to entry such as you state.
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